Treading through the muddy waters of M&A

By Kevin Huhn

It is hard to imagine someone else stepping in and taking over your team when you are at your peak. For 30 years I coached hockey teams and the first time I was fired I was devastated. I remember the feeling of letting so many people down. I felt useless and could not do anything about the situation; only that I had to step aside as someone else took over the reigns to running the team I had put together.

AS A BUSINESS owner, president or leader of a company, when the reigns are turned over to someone else, I wonder if the same feelings surface?

In the marketplace there is a saying, “All businesses will transition at some time.”

For most of my professional business life I have watched mergers and acquisitions (M&A) of companies take place in a variety of industries. Banking had TD and Canada Trust come together; Alberta Investment Management Company, Ontario Teachers’ Pension Plan and OMERS teamed up to acquire London City Airport Ltd; Cara Operations took over Prime Restaurants in the restaurant and dining industry.

But what I learned from a friend of mine Paul Simpson, CPA, CA, (Managing Director of Norton McMullen Corporate Finance, a professional financial advisory firm providing M&A services), M&As do not just take place with high profiled companies in Canada. Small to Medium sized companies go through M&As as well.

To Sell Or Not To Sell

Mergers and acquisitions don’t only exist when someone wants to retire. Businesses go through phases. They have a start-up phase. They go through a growth phase. And then there is a maturity phase. “If a business does not keep growing it generally goes into decline,” Paul started with stating the obvious. “For the owner of the business, the best time to sell is when you have a buyer.”

Thinking about my time as a hockey coach and being forced to leave as the leader, sometimes things are out of your hands. Decisions get made leaving you and everyone on your team in a state of flux, while still needing to deliver. Business owners who sell to another party, go through the same thing. The transition of ownership has to take place, while the company still needs to deliver to its customers, employees and suppliers.

“M&A is a process,” he explained. “It focuses on finding a buyer or seller, negotiating, due diligence and closing the deal.”

The top reasons mergers and acquisitions take place for most small to medium sized businesses are:

a) “The Baby Boomer effect: Desire to retire and get out of the business.”
b) “Poor Health of the business owner, you would be surprised at how personal health plays a key role in business transitions.”
Other reasons include:
c) “Family status change like a divorce
d) “Lack of funding for the business to operate”

“We had a client who did not have a will and suddenly passed away,” Simpson said. “He was the owner and his wife had to step in. The banks froze the money and left her in a financial mess with trying to figure out how the company would make payroll. The operation of your business is affected by your health.”

What You Need to Know Before You Think About M&A

“The total time from starting the process until getting the money out of the business for an owner could take 3 years,” he explained.

“Owners stay through the process and are often needed to continue to lead the existing team. And provide the new incoming people with training and passing on their expertise.”

Here are two musts for prospects:

#1 Plan: Look at what is and what is ahead

Be clear with the components of business structure, tax status and leadership. Ask the questions: What is the interest for someone to take over this business? Is there a demand for what we do? Is there access to capital we could use? Up until when do I want to keep running this business? How quick can we get to market?

#2 Hire An Advisor: Mergers and Acquisitions is a process. While you run the business, the M&A process is running to create the transition you are looking to have. Be ready to expect a timeline of nine to 12 months for the M&A process to conclude plus 1 to 2 years to transition out of the business.

There are two sides in every M&A transaction: a buyer side and a seller side.

“We help a buyer who: wants to grow revenue; wants to take over a competitor; wants to get talent, technology, access to new markets that they don’t have. We help a seller who: wants to retire; wants to turn to cash out of the business or has other priorities in life.”

M&A is an either or and co-dependant. Paul explained that when the process works it is a win-win result for the buyer and the seller. However, when M&A doesn’t work it is a loselose outcome. “The buyer does not get what they anticipated and the seller does not get what was promised. Both sides need each other.”

M&A 101

The two biggest myths about M&A business owners have are: the best time to sell the business is when the owner wants to retire; and secondly, they can sell the business on their own and get maximum value.

“Avoid doing M&As alone,” Simpson said. “The emotional aspect is high. The negotiations are transactional and the attachment to the business is personal. M&A experts calm the waters.”

There are many components to the M&A process. Although the goal might seem simple, like taking the money and run, the steps are many and involved. Keys to success include:

If you are the seller,

1) “Have a realistic valuation. Get an objective value of the business.”
2) “Ensure sustainable cash flow. Make sure there is a predictability in the finances.”
3) “Diversify. The merger and acquisition process can cause volatility. Have multiple customers and suppliers in the event of attrition.”

If you are the buyer,

1) “Understand the intangibles. How will the values and culture of this business fit with yours?”
2) “What is the plan to transition people? Who are the key people and how do you keep them?”

Lastly, have a clear objective to make the process stay the course. What are you looking to get out of this M&A?

Kevin Huhn is the Founder of Be Your Best Today a PR and Communication Firm that helps small to medium-sized businesses clarify their message, get known and drive traffic. To learn more visit beyourbesttoday.ca